Customer Lifetime Value and Customer Acquisition Cost
Customer Lifetime Value
Customer lifetime value (CLV or CLTV) is an estimate of the total purchases a customer will make over the life of its relationship with the business and the monetary value those purchases will bring to the business.
🟡 CLTV; allows you to measure how valuable each customer is to your business.
🟡 CLTV; enables you to make better decisions when determining your marketing strategies.
🟡 CLTV; can help you segment customers into different segments.
🟡 CLTV; enables you to measure the return on investment in customer relationships
The formula for CLTV is as follows:
Average Purchase Value = Total Purchase Revenue / Total Number of Purchase
Average Purchase Frequency = Total Number of Purchases / Customer Lifespan
Customer Lifespan = (Last Purchase Date- First Purchase Date) / Chosen Time Unit
Note: You need to choose a time unit to indicate the time taken over the customer lifetime; this can be days, months or years. It is important to convert all components to the same unit of time so that your calculations are consistent and meaningful.
For example, if you have chosen 12 months (one year) instead of 365 days in the “Customer Lifespan” calculations, the “chosen time unit” is considered a year.
⭕️ ️Example ⭕️
We have the data of X Store, an e-commerce company. Let’s calculate CLTV based on this data.
Total Number of Purchases: 1000
Total Purchase Revenue: 50000 €
Total Number of Customers: 200
First Purchase Date: January 1, 2022
Last Purchase Date: December 31, 2022
Let’s use the year as the chosen unit of time. Now let’s move on to the calculations:
Average Purchase Value = 50000 / 1000 = 50 €
Customer Lifespan = 31 December 2022 — 1 January 2022 / 1 = 365 days
Average Purchase Frequency = 1000 / 365 = 2.74
Customer Lifetime Value (CLTV) = 50 * 2.74 * 365 = 49975 €
As a result, the lifetime value of customers in this example would be approximately 49975 Euros (€).
A CLTV value of €49975 represents the estimated total value that a customer brings to your business over the entire interaction period.
This value can be interpreted as the amount of revenue you can expect to generate from a single customer across all their interactions with your business.
I have left a video below about measuring Customer Lifetime Value.
Customer Acquisition Cost
Customer acquisition cost (CAC) refers to the total cost of acquiring a customer.
Customer Acquisition Cost represents the total cost the business spends to acquire a new customer.
🟡 CAC; includes all costs related to customer acquisition such as marketing campaigns, advertising costs, sales team salaries, marketing software and more.
🟡 CAC; helps assess the financial efficiency of customer acquisition efforts.
🟡 CAC; provides insight into how much budget should be allocated to marketing and sales activities.
🟡 CAC; helps to evaluate the effectiveness of different marketing and advertising channels.
🟡 CAC; provides insights into changes in customer behavior and different strategies for different periods or customer segments.
🟡By comparing CAC with Customer Lifetime Value (CLTV), it helps to determine whether investments in new customer acquisition are profitable and lead to long-term relationships.
⭕️ Example ⭕️
The company wants to bring its products to a wider audience on online platforms. Therefore, it was decided to launch a new digital marketing campaign. The campaign will use channels such as Facebook ads, Google Ads and e-mail marketing.
The company wants to bring its products to a wide audience on online platforms. Therefore, it was decided to launch a new digital marketing campaign. The campaign will use channels such as Facebook ads, Google Ads and e-mail marketing.
Facebook Ads: 15,000 Euros spent, 150 new customers acquired.
Google Ads: 7,500 Euros spent, 75 new customers acquired.
Email Marketing: 2,500 Euros spent, 25 new customers acquired.
Total Budget Spent : A total of 25,000 Euros was spent during the campaign period.
Number of New Customers: 250 new customers were acquired thanks to the campaign.
Total Budget Spent: 15,000 + 7,500 + 2,500 = 25,000 Euro
Total Number of New Customers: 150 + 75 + 25 = 250 customers
Total Customer Acquisition Cost (CAC):
CAC = Total Budget Spent / Number of New Customers
CAC = 25,000 Euro / 250 clients
CAC = 100 Euro
In this case, an average of €100 is spent for each new customer acquisition. This information can be used to assess the cost-effectiveness of a company’s digital marketing strategy and provide a reference point for future campaigns.
I have left below a video on measuring Customer Acquisition Cost.
In this article, I discussed the concepts and formulas of Customer Lifetime Value and Customer Acquisition Cost.
I hope this has been a useful content for you. 🌞
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